OECD was expected to come out with a common tax framework by December this year, now it’s expected to do so mid-next year.
This could mean that most countries including India would implement their own plans rather than wait for OECD’s framework on how to tax digital giants.
India has already started partly taxing these global giants under equalisation levy and has also introduced significant economic presence (SEP) framework last year.
Global digital giants including Google, Facebook, Amazon, LinkedIn and Netflix could face larger domestic tax liability as OECD’s international collaboration that had hoped to create a consensus on how to tax these companies by December, now postponed it to mid-next year.
“India was only waiting for the OECD to give some guidance around how economies must tax these global giants. Now that no consensus seems to be emerging, most large economies would go ahead with their own domestic taxes and regulations,” said a person close to the government.
India, along with other OECD members, was looking to bring some of the biggest multinationals under the domestic tax net.
OECD had been trying to bring large economies on one page under its Base Erosion and Profit Shifting (BEPS) framework.
“India too deferred the implementation of SEP until April 2021. We may not wait any longer and that would mean digital majors can be taxed in India on global profits based on their India revenues in certain cases. This would be in addition to the unilateral measure of Equalisation levy introduced recently,” said Ajay Rotti, Partner, Dhruva Advisors.
The US has already threatened reciprocal treatment of any economy that attempts to tax the digital giants. The US in June has already launched an investigation on how some of the countries including India are taxing digital companies such as Google, Twitter and Facebook in India.
India in 2018 had said that global digital companies have a large consumer base in India but don’t pay enough taxes domestically.
There is a global push to bring the digital giants under the ambit of local taxes. Many such companies deliberately base themselves in low-tax jurisdictions.
India has come up with the SEP framework, whereby it can tax global giants taking their user base into consideration, a move objected by the US.
Tax experts say that the race to tax digital giants is set to create problems for some of the larger companies operating in India.
“Failure or even significant delay in reaching a consensus would mean that more countries would want to introduce unilateral legislation for taxing digital businesses. This could mean further trade conflicts and potential double taxation for MNCs. However if a consensus is reached, it would result in a shift in tax collection from low tax countries to consumer economies such as India,” said Rajesh Gandhi, partner, Deloitte India.
The issue, say industry trackers, is $ 100 billion large. Most of the large digital giants have created a maze of companies across the world as part of their tax planning. This also means that they don’t pay domestic taxes in several jurisdictions as per the liking of the local governments.
Take India for instance, government officials say that digital giants earn as much as Rs 25,000 crore from India but they do not pay domestic tax on the entire amount.
In most cases digital giants have created domestic companies that only charge “fees” or “commissions” and domestic tax (30%) is only paid on this portion of the amount.
To circumvent this, the Indian government has introduced an equalisation levy—6% on advertising revenue and 2% on online purchases—on digital transactions.
According to the people in the know, the concern among digital companies was that they might face tax in different jurisdictions for the same profits.
Industry trackers say that for most companies, the sales in India are not as high in percentage terms when compared to other major jurisdictions.
“The concern is that if the tax department challenges the current tax structures based on domestic regulations, it could have an impact on the revenue from other jurisdictions as well,” said a person in the know.
Under SEP framework tax department can tax digital companies in India even if they don’t have a permanent establishment (PE) here.PE is a concept in taxation that decides where a company must pay taxes. India’s move essentially means companies that do not have a single employee or office in the country too can be taxed by the income tax department here.